Using Donor Advised Funds: Fast Facts for Engaged Grantmakers

Aug 16, 2017

The world of grantmaking can be quite overwhelming. Paperwork, tax information and various other complexities can leave the most well-intentioned organizations asking if it is all worth it. This is especially true for those who wish to take part in making funds available to local and global not-for-profit organizations. While it is difficult, finding the best way to structure your foundation is incredibly important to supporting the causes you hold dear. If you know the basics, you know there are multiple approaches to giving. A quickly growing and efficient approach is found in donor advised funds, or DAFs. Between 2014 and 2015, grants from donor advised funds grew 27%, reaching $12.49 billion. This is a monumental climb from the $7.24 billion worth of grants given through donor advised funds in 2010. This upwards trend is only expected to continue.

What are donor advised funds and why are they gaining such traction and in so little time?

In the simplest of terms, donor advised funds are charitable investment accounts. They are typically managed by a tax –exempt organization like that of a charitable organization or a local community foundation. As a tax preferenced account, the donor will receive the tax deduction for their contribution immediately though the funds are used at a later date. Once the donor receives the tax acknowledgement, they are not in direct control of the use of their donations, though they can suggest potential charities and causes. Instead, the sponsoring organization decides the ultimate direction of the funding.

When it comes to donor advised funds, every grantmaker should know…

Operational Funds are Lower than Private Foundations

At the 2017 CyberGrants User Conference (CGUC), speaker Howard Husock, VP of Research & Publications for the Manhattan Institute, mentioned the success and efficiency of donor advised funds as told by National Philanthropic Trust’s Eileen R. Hiesman (@erheismanNPT):

“There is almost 10x the amount of assets in private foundations but they only give away 5%. DAFs have 1/10th the amount of assets than private foundations do on average, and we give about 20%.”

Though the separation of charitable deduction and actual donation is a feature of private (non-operating) foundations, the cost of operating private foundations is significantly higher. In addition, these foundations may face excise taxes on investment income, require an annual 5% distribution and are subjected to lower limitations on tax deductibility. The simpler structure also helps families and community groups become grantmakers with more modest beginnings. This is great news especially for local nonprofits as these more modest organizations are often more inclined to help the local causes.

Simpler Method for Donating Appreciated Assets

Not all donors have liquid assets, but stocks, real estate and other appreciated assets can be valuable. Donor advised funds allow those assets to grow within the fund tax free, gaining value. Meanwhile, donors have higher limits when donating those appreciated assets and nonprofits have a simpler donation transaction.

“The donor advised funds have gotten very good at helping you essentially turn those assets into cash. That’s something that if you went down to your local homeless shelter, they would have no idea how to do that.”
-Stacy Palmer, The Chronicle of Philanthropy

International Giving is More Streamlined

Donating to charities outside of the US is wrought with challenges and restrictions. Though the process is more complicated, donors are still interested in helping causes overseas and outside the nation. Because the US vets charities differently than many other nations, gaining favorable tax treatment can be difficult. Donor advised funds are a charitable vehicle that can help eliminate some of those barriers and help ensure an impactful international giving experience for the donor.

The donor advised funds’ sponsoring organization still conduct their own audit of an international charity and perform other risk mitigation practices. Because of this need for due diligence, it isn’t uncommon for even some of the larger donor advised funds to avoid international giving participation. That is where organizations like Charities Aid Foundation of America (CAF) steps in. The global grantmaking organization steps in to assist companies, foundations and individuals ease the complications of international giving.

#Administrative Responsibility Falls on the Grantmaker

Donor advised funds have a great deal of benefit for every entity involved, however there are some trade-offs. For the donor, who receives their tax deductible immediately, they must sign over some of the ability to choose their donation’s ultimate destination. The sponsoring organization, or donor advised fund grantmaker, is given more control over donations and how they are administered. Because these funds aren’t immediately granted, there is an opportunity to accumulate and administer impactful grants, especially with additional time to develop well-organized grant programs.

The trade-off is an increased responsibility to your donors and additional administrative burden. The grantmaker is responsible for establishing the overarching vision of their donor advised fund, ensuring donors feel confident contributing to it. Vetting the organizations who receive the gift is also the responsibility of the grantmaker, in addition to paperwork and maintaining legal compliance. Not to mention that many grantmakers hope to measure gift-giving impact and organize annual reports for donors and to guide future giving decisions.

The potential for donor advised funds is massive, so don’t let administrative burden be the reason your organization misses out of the benefits. CyberGrants grant management software has specific dashboards to help monitor participation, track budget, manage documents and ease the entire grantmaking process. Whether you your organization is highly-experienced in charitable giving or just beginning the grantmaking journey, CyberGrants can bring the organization and simplicity you wouldn’t believe was possible. Schedule a demo to see for yourself.